The U.S. Supreme Court heard oral arguments this week in the case of Czyzewski v. Jevic Holding Corp. Although veteran Court watchers caution about seeking to predict ultimate rulings based on justices’ questions and stated concerns, it is difficult to read the hearing transcript and not come away with the view that at least some of the Court’s members are not keen to rule on the merits here. This would be a relief to many bankruptcy practitioners and commentators who have been concerned about a broad ruling in this case that could significantly limit the ability of parties in bankruptcy cases to craft solutions to difficult issues which do not fit within the strict parameters of the Bankruptcy Code. A procedural disposition appears possible; alternatively, if a ruling on the merits does get handed down, it is likely to be narrowly crafted.

The complications of Jevic, and the difficult choices facing the Court here, stem from both the knottiness of the specific statutory issues which have been presented, and the complicated process of corporate bankruptcy proceedings in general. The statutory issues are both broad and narrow: do bankruptcy courts have authority to approve a resolution of a Chapter 11 bankruptcy case in a manner different from the three options specified by the Bankruptcy Code – confirmed plan, conversion to a liquidation under Chapter 7, or dismissal? Specifically, if the case is to be dismissed, can parties “structure” the dismissal to include substantive provisions regarding the distribution of assets of a debtor’s bankruptcy estate, instead of simply leaving parties to their remedies under applicable non-bankruptcy law? If yes, then can such provisions effect a distribution of those assets in a manner that contravenes the Bankruptcy Code’s priority scheme?

At the hearing, the justices grappled with whether they were being asked to rule on the broader question of the permissibility of structured dismissals, or the narrower question of adherence to the priority rules. Justice Kagan specifically pressed the petitioners’ counsel to articulate the holding that they were requesting. Justice Alito also pushed on this point, and even suggested that the petitioners may have argued a different question than the one on which the Court granted certiorari:

“Something strange seems to have happened between the petition stage and the briefing stage in the case. The question that you asked us to take was whether a bankruptcy court may authorize the distribution of settlement proceeds in a manner that violates the statutory priority scheme . . . And we took the case. But then the question that you address in your brief refers to ‘structured dismissal.’ There is nothing about structured dismissal in the question that you asked us to take . . . .”

On the merits, several justices did express concern about permitting parties to reach settlements that allocate assets in a manner that diverges from the Bankruptcy Code’s priority rules without the consent of all affected parties. At the same time, however, at least some of the Court members were aware of the “extraordinary” circumstances presented, and the possible implications of a broad ruling if all deviations from the priority rules were to be prohibited. Justice Kagan acknowledged that the case could be “one of these extraordinary circumstances in which some people can be better off and nobody will be made worse off. Still the question is, where is the authorization for that in the Bankruptcy Code?” Chief Justice Roberts observed to respondents’ counsel that “the reasonableness of your position is directly related to how extraordinary the extraordinary circumstances have to be.”

The ambivalence may suggest that some of the justices prefer to avoid a ruling on the merits and are looking for another path. As Justice Alito noted, a clear conflict between circuits exists on the permissibility of asset distributions at variance with the Bankruptcy Code’s priority scheme, but not on the issue of structured dismissals. His statement above about the possible change in the framing of the question presented could be a prelude to a procedural disposition of the case, such as a dismissal of the appeal based upon an improvident granting of certiorari. In any event, even with a ruling on the merits it appears less likely that Jevic will be the seminal case that some have feared.

Ben Feder is special counsel in Kelley Drye & Warren's New York office. He focuses his practice on bankruptcy and restructuring matters. Mr. Feder represents bank lenders, debtors, bondholders, creditors' More

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The firm represents creditors’ committees, debtors, financial institutions, indenture trustees, bondholders, landlords, suppliers and trading partners in out-of-court restructurings, bankruptcy reorganizations, and liquidations and related litigation. Our lawyers are at the forefront in working with clients to develop and execute strategies to maximize recovery, minimize exposure and realize the best business outcome.